Yesterday, shares of Illumina (ILMN) sold off sharply after the genetic-sequencing giant pre-announced disappointing third-quarter results and took forward guidance down. Despite the decline in the stock, however, I remain bullish on the company's long-term future.
Over the last two weeks, shares of San Diego-based Illumina have been destroyed. After hitting a high of $242 in July, the stock is down some 42%. Things turned ugly when the company missed the second quarter a few months ago. Last Thursday, Pacific Biosciences of California (PACB) announced a new gene sequencing machine, which dropped Illumina another 11%. Then, last night, the third-quarter preannouncement whacked the stock another 16%. After this beating, investors probably want to donate their body to science.
After Monday's close, the company announced third-quarter revenue of $550 million, up 14%, but $19 million short of consensus expectations. Management also cut fourth-quarter guidance by $32 million to $570 million, only an 11% increase from last year. For full-year 2015, that's only 18% revenue growth vs. the expected 21% estimate of $2.25 billion.
Obviously, analysts are going to take a hacksaw to 2016 estimates, because without any new products, the company will never be able to hit the estimate of $2.6 billion, or 18% revenue growth. According to the company, sales in Europe and the Asia-Pacific region are weak. Furthermore, the strong dollar has had more of a negative impact than expected.
Last week, investors freaked out over a new sequencing machine from Pacific Biosciences called Sequel. The company claims its new sequencing machine is 33% smaller, costs 50% less and has seven times the output of its previous machine. Pacific Biosciences says it can sequence an entire genome for about $3,000, but that claim is misleading. The Sequel is only 86% accurate in a single pass. To get 99.6% accuracy, which is the gold standard of sequencing, the Sequel needs multiple passes, which chews up over $10,000 worth of consumables.
Illumina's HiSeq can knock out an entire gene for about $1,000. Put another way, the Sequel can sequence roughly 100 whole human genomes per year, which is about one-eighth the throughput of Illumina's HiSeq 3000. When you add in the cost of machine, amortization and depreciation, on a cost per genome basis, the Sequel is five times more expensive than the HiSeq. What's more, Pacific Biosciences has only 200 machines installed in the field vs. over 5,000 for Illumina.
ILMN shares have been a favorite pick of the momentum crowd. Just a few days ago, the stock was trading at around 50 times trailing earnings. Obviously at that multiple, things are going to get crazy. In the summer of 2011, the stock lost 65% of its value only to rally back on a tsunami of new products and gigantic revenue growth.
Illumina has such a commanding lead in the sequencing business I can't see how the stock can stay down for long. Its technology and cost of ownership is unsurpassed. Since 2011, revenue is up over 100% and earnings per share have gone from $0.62 to over $3.35.
With the biotech market in bear territory, I would wait until Illumina has more product announcements or until the stock finds a bottom.